Timbercreek Financial Corp
TSX:TF
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
6.45
8.25
|
| Price Target |
|
We'll email you a reminder when the closing price reaches CAD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Timbercreek Financial Corp
You don't have any saved screeners yet
Good day, ladies and gentlemen. Welcome to Timbercreek Financial First Quarter Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the meeting over to Blair Tamblyn. Please go ahead.
Great. Thank you. Good afternoon, everyone, and thank you for joining us to discuss the first quarter financial results. I'm joined today, as usual, by Scott Rowland, CIO; Tracy Johnston, CFO; and Geoff McTait, Head of Canadian Originations and Global Syndication. Given the proximity to Q4 results, our prepared remarks should be fairly brief today.
Overall, it was a good start to 2022. Origination activity was robust, and we exited the quarter with a larger mortgage portfolio. We achieved distributable income per share of $0.18, which was within our historical range and our targeted payout ratio. And we completed transactions for 2 of the remaining noncore assets. We previewed these deals with our Q4 results, and I will leave it to Scott to cover the details. In short, these are important milestones as we look to redirect that capital.
While the results were solid overall, we did see some rate compression in the period. Scott will also talk about the dynamics here, and why we see this reversing in the near term and how we are well positioned to benefit from rising rates during 2022 and deliver another strong year for our shareholders.
It's also important to understand that given the short duration of our loans, we have considerable flexibility in rising rate environment versus, say, a REIT or a bank, given the longer duration of their loan portfolios typically.
With that, I'll turn it over to Scott to discuss the portfolio trends and market conditions. Scott?
Thanks, Blair, and good afternoon, everyone. I will focus my comments today on meaningful changes and trends in the portfolio as well as discuss our near-term outlook. Portfolio continues to perform well, with no new additions either Stage 2 or Stage 3 loans. In a period of equity market volatility, our portfolio remains durable and resilient.
This comes back to our income-producing focus. Here you see a snapshot of several portfolio KPIs. At quarter end, 90.3% of our investments were secured by income-producing assets up from Q4, and just over 55% were in multifamily residential assets, including retirement. This was versus 48% at the end of the year. And we remain almost entirely invested in urban markets, which provide superior liquidity.
In terms of key metrics, first mortgages represented 92.5% of the portfolio, down slightly from 93.2% at Q4. Our weighted average loan-to-value was 71.3%, up slightly from 70.1% in Q4. Portfolio's weighted average interest rate, or WAIR, was 6.6% with an exit rate of 6.7% as at March 31, 2022, down from an average of 6.9% in Q4. The decrease in WAIR is reflective of the multiyear low interest rate environment and the turnover of older, higher coupon rate loans over time.
While WAIR has fallen, the business has been able to maintain our dividend payout ratio as our credit facility costs have also decreased. Going forward, we now expect to see WAIR growth as interest rates increase. And while there will be some compression in credit spreads and our internal credit facility cost will increase, overall, we view rising rates as having a positive effect on distributable income over the coming quarters.
In terms of capital deployment, it was a particularly strong quarter on the funding front with the majority of new exposure consisting of desirable multifamily assets as well as an increase in industrial exposure. In Q1, we invested roughly $227 million in new mortgage investments and additional advances on existing mortgages, our strongest Q1 since 2018. This was offset by repayments of $122 million, resulting in a net increase in the portfolio of roughly $104 million from Q4. First quarter turnover was also 11.4%.
The pipeline remains strong, and we continue to expect the 2022 operating environment to be noticeably improved relative to 2020 and 2021. The portfolio remains well diversified and concentrated in urban markets, in the largest provinces with approximately 98% of the portfolio in Ontario, British Columbia, Quebec and Alberta. As we discussed last quarter, we have steadily increased our exposure in Quebec in recent quarters, and we ended Q1 with a weighting of 40.5%. This increase reflects our expanded presence in the market and the attractive deal flow this team is generating across a diverse range of asset types.
Last quarter, we also talked about accelerating our realization plans for the small number of noncore and nonincome-producing assets remaining in the portfolio. We made some meaningful progress on 2 of these. First, we closed the sale of the Sunrise multifamily investment property portfolio in April for proceeds approximating its carrying value. In conjunction with the sale, we also exited the investment properties credit facility and issued a $5.5 million vendor take-back mortgage to the purchaser.
Secondly, we closed on a transaction with our JV partner involving the fair value assets at Macey Bay and Lagoon City. As part of the transaction, we have fully exited the Macey Bay mobile home park development site and have consolidated into a 100% interest of set of properties in the Lagoon City area. The majority of the assets that we now own are residential development lands, and we will be engaging with a commercial broker to begin the final disposition process in an orderly manner.
Finally, we continue to seek resolution on Northumberland Mall, which as of today is still on the book. The owner remains engaged and is working through a refinancing plan, and we hope to have this fully resolved this quarter. However, based on delays, we are also developing an alternative disposition plan that could yield a very similar result. Either way, it remains a priority to see Northumberland repaid as soon as possible.
Overall, as we monetize these assets, we will be able to reinvest the capital in our core investment strategy of current pay income-producing mortgages, mortgages that will be accretive to distributable income. We will also avoid the quarter-to-quarter fluctuations and distractions of net income caused by fair value gains and losses.
At this point, I'll turn it over to Tracy to review the financials in more detail.
Thanks, Scott, and good afternoon, everyone. Our full filings are available online, so I will focus on the main highlights of the first quarter. Net investment income on financial assets measured at amortized cost was $22.7 million in Q1, up modestly compared with $22.4 million in the prior year, mainly due to higher weighted average net investments, partially offset by a lower weighted average interest rate. As Scott mentioned, we expect to see this rate trend reversing course in the coming quarters.
Net rental income was $382,000 in the quarter, up from the same period last year, reflecting stable occupancy levels. From Scott's comments earlier, we completed the sale of the Sunrise portfolio in early Q2, so you should expect this revenue line to be lower in Q2 and out of the quarterly financials deal on that point along with the associated financing costs on the credit facility for investment properties. We expect this to be more than offset by additional interest on fee income.
Lender fee income was $2.5 million, marginally down from $2.6 million in Q1 2021. While new net mortgage fundings were considerably higher this quarter than in Q1 2021, last year's results included some exceptional revenue forbearance fees in more than $700,000. Q1 net income was $12.8 million compared to $15 million in Q1 last year. After adjusting for fair value gains and losses on financial assets measured at fair value through profit and loss, adjusted net income was $13.8 million this quarter versus $14.1 million in Q1 2021.
Basic and diluted adjusted earnings per share was $0.17 for the quarter compared with the same in the prior year. We reported adjusted distributable income of $15.2 million or $0.18 per share, down from $0.19 per share in last year's Q1, yet within the range we have generated over the past 8 quarters or more. This represented a distributable income payout ratio and adjusted distributable income payout ratio of 93.9%, which continues to be well in line with our desired range in the mid-90s.
Turning now to the balance sheet. The net value of the mortgage portfolio, excluding syndications, was $1.26 billion at the end of the quarter, an increase of about $104 million from the fourth quarter. The enhanced return portfolio decreased to $80.6 million from $84.6 million in Q4. This portfolio included $67.1 million of other investments and $13.5 million of net equity and investment properties at quarter end, which, as noted earlier, have now been disposed.
During Q1, we also added to our available credit. The credit facility for mortgage investments was upsized by $40 million to $575 million, giving us even more capacity to pursue mortgage investments, which are accretive to DI. The amount drawn on this facility was $516 million at the end of Q1 2022 compared to $420 million at the end of Q4 2021. Between our ability to syndicate normal course repayments and line availability, we remain well capitalized to meet the demand in the market.
I will now turn the call back to Scott for closing comments.
Thanks, Tracy. It was a solid first quarter, and we continue to be encouraged by the outlook for 2022. Transaction pipeline remains healthy, reflecting better commercial real estate conditions and our standing and reputation in the market nationally. We continue to be in a strong liquidity position, and we will free up additional capital through our efforts to monetize noncore assets.
Lastly, we expect interest rate increases to be beneficial to our results as the majority of our loans are structured as flowing rate. As Blair highlighted and our history has shown, we have the flexibility to react to changing real estate and market fundamentals. In a rising rate environment, we fully expect to do the same.
That completes our prepared remarks. With that, we will open the call to questions. Operator?
[Operator Instructions] The first question comes from Jaeme Gloyn.
Can you hear me? Hello. Can you hear me?
Yes.
Okay. That's great. Yes. So first question, just thinking about the growth outlook and the opportunities that are available to you with the increased credit facility. How should we think about the portfolio evolution through '22 and '23? Like best guess, would you think it should be flat, up a few points, obviously, a good strong Q1 for production.
Let me get also that question with Geoff, Jaeme. I think out of the gate, I'd say we're going to -- we continue to -- I mean the trap that we have, the equity plus the timing -- the size of the portfolio, we are seeing a lot of demand for the product. Again, we had a very strong Q1. We have a strong pipeline. So I think we will continue to show sort of a sustained sort of steady growth model. Again, we want to keep our debt-to-asset ratio accretive and make sure we're focused on our DI ratio.
But really, the environment is strong, and we'll look to pick up yield and sort of optimize things where we can in this environment. And I think, from a mix perspective, we're seeing a lot of multifamily activity, which we like. We're still leaning into sort of multi-industrial where we can find it. A little cautious still on retail and office, call that a bit of a hangover from the pandemic. That's -- we're continuing to monitoring that and those other asset classes for opportunity. So we're continuing to sort of be focused on safety a bit. But from an overall sort of macro environment, I would continue -- I would say we will continue to see sort of steady, stable growth.
I don't know, Geoff, do you want to add anything to that?
Yes. I mean I think you covered it mostly. I mean in general, I would say, with some rising interest rates, where and when some of our borrowers were going through sort of a bit of a transition improvement of their asset, racing to get to those historically low interest rate exits with some increases of late, I think there's opportunities for them to take a little bit more time, turn a few more units, a bit more of an interim transitional period, which will create increased opportunity for us in the multifamily space. And as Scott noted, we're seeing good opportunities in the industrial space as well right now.
Okay. And as you're thinking about the growth part of what can help drive future growth is continued use of the ATM. And I'm just -- I just want to get some updated views given the share price move lower recently. Are you still comfortable executing on the ATM at these levels? Or is that something that you'd think to maybe peel back and let the leverage increase a little bit?
Yes. Good question, Jaeme. Go ahead, Tracy.
Perfect. Yes, great question and certainly something that we've been watching. So we've obviously been in blackout, so the ATM has been on pause the last couple of weeks. We're currently monitoring it. We typically in the quarter, we issued above $9.55, which is certainly accretive and helpful to us. I think as the share price dips below that, we'll consider what the opportunities are ahead of us, and if we do think that we can deploy accretively. It is helpful as we grow the book just to maintain our ratios from the debt equity split. So it is a useful tool for us to kind of match the raise on the debt side with equity. So if it makes sense, we'll certainly continue to use it, but we'll be a little bit more cautious going forward.
Okay. And last theme or question for me is just -- are you able to provide us with a little bit of sensitivity around the upside to rising interest rates on a net impact basis? So maybe thinking about it, if we take the portfolio as it is today, you roll it forward into Q2, at the current interest rate environment, how many basis points of lift would you get, or what kind of net interest income lift would you get from the current portfolio and the current interest rate environment today? And then thinking that all of us think through the next few steps in interest rate hikes.
Go ahead, Scott.
Yes. Listen, we look at it this way, right? So we have -- for rough, rough numbers, we have about $1.3 billion of earning assets and, call it, $500 million of debt. So you're sort of more than 2:1 levered on your sort of top line, that numerator above our sort of cost of funds denominator. Of course, there's other costs below the line there that shakes out to net margin, but that's just at a macro level, at a high level, that's sort of a 2:1 -- 2.5:1 ratio on the revenue line.
So in a rising rate environment, a couple of things happen. So for sure, we price our loans over prime. Over 90% of our book is floating, right, which is great. What does happen as interest rates go up, right? There is a little bit of a natural tension in the market with borrowers, right? So it's sort of like you go back to pre-COVID when the interest rates, mortgage coupons were contracting, we were able to hold rate a little bit longer. As you know, borrowers sort of have to pay a certain yield. As we go the other way now, there's definitely -- there will be a little bit of margin compression, right? As borrowers sort of fight to keep their lower rates.
Having said that, just as an example, in the past that we've had 75 basis points of prime increases right now. And I'll sort of speak for Geoff here. But I know we've sort of been capturing 50 to 75 basis points of that. Again, we're -- it's a competitive environment, so we're competing with other lenders. So there's a little bit of dynamic at play there. So overall, we sit there and you look at our model, floating rate model, as prime goes up, a 2, 2.5:1 sort of revenue over cost of funds, for sure, you should expect to see net margin expansion for us. What makes it a little nuance changes is predicting that movement with the borrower, right? So the borrower will have a bit of a drag on rates in the near term as we look to move the borrowers up. That affects that math a little bit.
It's probably a little early to sort of tell you or predict here is where we think the margin expansion is going to be. That's sort of my view other than to say it is going to be accretive in the rising rate environment, especially if we get back to towards more of a normalized lending level. I don't know, Tracy, or -- want to add anything else to that answer?
No, Scott, I think that makes sense. Certainly, we've spent a bit of time looking at it. We do -- after this most recent rate increase in April, we have most of the loans that are off through their floors now on the existing book. We still have a handful, which are below, which are kind of '19, '20 vintage loans that were a little bit higher that still needs to come up through. So those would be renewed or paid off or will come through in further rate increases.
Jaeme, it's Blair. I will further add to Tracy's point. So that's contractual pass-through, right? So Scott's talking about new originations and a push-pull in the marketplace, obviously, competitiveness. What Tracy is talking about it is the existing book. So you most certainly will see the rates move up on the existing book. The question is, how much of the portfolio will turn over in the next 2, 3, 4 quarters, right? And that's -- it moves around a little bit as you've come to know.
Right, right. So the risk that Scott and yourself are referring to is that as these rates are moving higher on a floating rate basis for your borrowers, they are now seeking other alternative forms of financing, shopping their -- dropping their loan and their property to other lenders to try and keep those rates down, and that's where the squeeze might -- or I guess, where you might not get the kind of lift that we would otherwise expect?
I wouldn't call it a squeeze. I mean, it's -- rising rates are a good thing to a certain point, right? I mean, obviously, if we see prime go up 500 basis points, we're all going to be worried about other things. But the -- we lend in a competitive environment in any rate environment to those. So I think it's -- Scott is just trying to give you some flavor and Geoff as well on what the nuances of it are. I mean we're not -- as Scott said, we're picking up 50 to 75 basis points up the initial increases. So that's a sound bite, which I think is helpful, and then we'll just continue to maximize the rates we can generate.
Yes. And Jaeme, I'll give you mathematically here for a second, right? And for everyone on the call. If I have a $1.3 billion of revenue-producing mortgages, say, and we'll use $500 million of credit line debt, so $1.3 billion and $500 million. Let's just assume for a second that interest rates go up a point -- 1%, right? That 1% on that $1.3 billion, that's $13 million of extra income. My credit line cost goes up 5%, which is $5 million. So that would be a net $8 million to the bottom line.
Now having said that what I'm saying -- what I'm suggesting is that $1.3 billion, you probably don't get it at all. Again, it's just some rate compression. But even if we recover 1% of that, that's $10 million, like I mean, like 80 basis points of that 1%, about $10 million instead of $13 million, that's still $10 million over $5 million and net positive by $5 million, right?
So even with that sort of compression we're expecting, by compression, we're still expecting to recover 80% plus of interest rate increases. So net-net, it's accretive, exactly what that is going to be, how we are modeling that, we kind of need to have it work through the book a bit and see how the environment unfolds. I think it's all we're suggesting. And certainly a topic we can give a little more color and clarity as we get into sort of Q2 and Q3. But overall, net-net, it will be accretive.
The next question comes from Rasib Bhanji.
Can you hear me okay?
Yes.
So just wanted to continue on the mortgage rate discussion. I guess the other big factor here affecting mortgages would be competition in the market. So could you provide some color on how things are today versus maybe last year? And how competitive the market was pre-COVID?
Yes, I can speak to that. I mean, I think the market remains -- it's a competitive market, no question. I don't think it's changed materially from pre-COVID. I think if -- with the exception of being sort of moments in time, right? So I think right at the outset of COVID, with the uncertainty that followed, I think there was some -- certain lenders in the market who stepped back momentarily, whether it was closed-end funds, who had redemptions or otherwise that impacted their liquidity on a very temporary basis or such that enabled us to take some advantage of that moment in time and opportunity to continue lending and being a steadfast and consistent lender in the market at that point in time.
I would say, with the rising rates today, again, it's another moment in time where it's creating a little bit of uncertainty, more particularly in the conventional markets, which, again, for us, does create some good opportunity to continue lending and continue to do what we're good at doing and what we understand how to do in particular in a rising rate environment, where and when the competition steps back momentarily.
I think the reality was that the conventional guys, who are typically on a lower leverage basis and not competing with us straight up over the last few years, have been getting more and more and more aggressive. So where historically, these conventional players wouldn't necessarily be direct competitors of ours, I think they have become increasingly competitive. In a rising rate environment, we're seeing them step back significantly, right? Back into their -- sort of sticking to their historical lending in a much more conventional space, which creates gaps, creates opportunity and open things up for us a little bit. Again, it's a moment in time, and I think it will normalize very quickly. And other than those moments, it's been pretty consistently competitive, I'd say.
Okay. That's helpful. And if I could just on the mortgage rate for this quarter at 6.6%. So the drop sequentially, would it be fair to say that's a reflection of just regular portfolio turnover and really strong originations during this quarter?
Yes. That's exactly -- go ahead, Tracy.
Yes, that's exactly it. So we had some -- just on the repayments, there are some higher rate loans from -- again, from an older vintage and really new originations at rates that we've seen in the last couple of quarters.
Okay. Understood. And if I could just switch gears to the noncore assets. Just a couple of questions over there. The Saskatchewan multifamily portfolio, so the $5.5 million take-back mortgage, are the terms relatively consistent with what your regular book would look like in terms of the interest rate and the repayment period?
Yes, it was 85% second mortgage. It's an 8% coupon with a 1.5% fee standard market terms for us.
Okay. Makes sense.
And we were 20% of that mortgage.
Got you. Okay. And just my last mortgage on the Macey Bay and Lagoon City assets. I guess just a little of a clarification question over here. In the financials, you mentioned there was a fair value loss of $656,000 related to this transaction. In the adjustments to net income, there's a $946,000 adjustment related to fair value to profit and loss assets. I just wanted to square the difference between those 2, the remaining $290,000. Could you share what that relates to?
Yes, yes, certainly. So the bulk of it is, as you identified, on the fair value net mortgages. The other piece relates to that is we have an investment in our other investments in an Irish fund. So the loss there is just largely related to FX and just fair value changes on that fund as it winds down.
The next question comes from Chris Koutsikaloudis.
Can you guys hear me?
Yes.
Just wanted to ask a question about your underwriting and how maybe that's changed given both the rising interest rate environment and the outlook for rates to continue rising over the next year? Just wondering if you're approaching underwriting differently?
Yes, I'll jump in here. It's Geoff. Listen, I think -- I mean, in general, I'd say our underwriting approach hasn't changed. I'd say the fundamental approach is consistent sort of throughout the cycle. But obviously, where and when costs continue to -- or interest rates continue to -- are expected to continue to rise, obviously, it does absolutely change our gear to sort of the takeout metrics.
The way we underwrite, obviously, the exit -- understanding identifying the exit is critical and foremost to how we size a loan initially and where and when that conventional refinancing rate is higher than it was and it -- or forecasted to continue to rise. It certainly impacts how much money we're willing to lend and would reduce our overall loan exposure, generally speaking, in that circumstance.
I think the expectation for us and obviously running sensitivities as we always would, but certainly, a very strong focus, where and when you have volatility in interest rates, you're going to spend a little bit more time sensitizing and focusing on how do we exit, what does that exit look like, and how does that impact how much -- how many loan dollars we're willing to provide.
Got it. Okay. And then just my other question is on the relationship and the behavior of your borrowers? Have you seen any change in the types of deals people are underwriting, maybe a slowdown in deal activity? I mean, clearly, Q1 results didn't reflect that, but do you anticipate or have you seen any change in the behavior of the borrowers you work with?
Listen, it's a good question. I mean, I think, obviously, rising rates, in particular -- in the beginning of a rising rate environment, it does create uncertainty. And so, obviously, as much as we're focused on that takeout and trying to understand where the math is going, the interim impact is obviously cash flow oriented and it hasn't necessarily resulted in a decline in value. I think, over time, real estate, historically, has been a bit of an inflation hedge and rents have tended to rise along with inflation, with those higher rents offsetting the effects of higher cap rates and generally sort of maintaining value on that basis.
But rising rents take time, and that happens over a period of time. And so in the interim, it does create uncertainty. And we're absolutely seeing failed transactions. I mean I think guys who were down in path thinking they can pay X can no longer pay X. And I mean part of that is driven by debt availability, but also, again, their views on their underwriting as it relates to what that future value is going to look like.
And so I think there is certainly some -- whether it's changing behavior, but it's certainly changing outcomes to some degree, pricing expectations on the exit are needing to be rationalized depending on the underlying liquidity of the vendor and the need for that transaction to happen. And again, for us, it's just very important to focus on sponsor and understand their liquidity and access to capital and otherwise ability to play through a challenging moment in time. And -- but absolutely, it is playing a role in terms of what someone is willing to pay and can slow things down and/or create retrades on pricing, which just given the momentum of uncertainty that we're in.
Yes. I'm just going to add to that, it's interesting, just some of the peers that I talked to you on the sort especially on the real estate ownership side of things, it's interesting. When you see some of these quick moments of change, like in this case, it happens to be rising interest rates, it does seem to -- it causes sort of the institutional owners of real estate to really relook at their portfolio and can cause churn, right? So people will look to move around the sort of their weightings within their portfolio, maybe certain assets they'll put up for sale that they might have otherwise held as they reconsider these things.
And the other thing I'm certainly seeing is, after 2 years of COVID, I think a lot of -- especially the larger owners, a lot of people are back at work on a more regular basis, actually is very hungry to raise capital, to deploy capital, to be active in the market. So we're certainly seeing -- and again, I think we saw this through Q1. And normally, in Q2, we see a bit of a slowdown in activity, but we're seeing it ramp up.
And I think it just really is at a full return to market. And I think people are actively managing their portfolio and looking at these changing environments and how they want to change, right? And for not saying that it's a mix some people are buying and some people are selling, but that's that churn in the market that creates opportunities for lenders like ourselves.
There are no other questions at this time. So I'll now turn the call back to Blair Tamblyn for closing remarks.
Great. Thank you, everyone, for taking the time to be with us today and hear the update. As you've heard, we're feeling pretty good about the state of the business right now and are looking forward to continuing to execute in this environment that we find ourselves in. Look forward to talking to you again in 90 days or so. Have a good afternoon.
Thank you. You'll now all be disconnected.